VZCZCXYZ0010
PP RUEHWEB

DE RUEHLP #1316/01 1361730
ZNR UUUUU ZZH
P 161730Z MAY 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 9200
INFO RUEHAC/AMEMBASSY ASUNCION 5846
RUEHRL/AMEMBASSY BERLIN 0101
RUEHBO/AMEMBASSY BOGOTA 3149
RUEHBR/AMEMBASSY BRASILIA 7006
RUEHBS/AMEMBASSY BRUSSELS 0700
RUEHBU/AMEMBASSY BUENOS AIRES 4254
RUEHCV/AMEMBASSY CARACAS 1547
RUEHPE/AMEMBASSY LIMA 1524
RUEHLO/AMEMBASSY LONDON 0082
RUEHMD/AMEMBASSY MADRID 3107
RUEHMN/AMEMBASSY MONTEVIDEO 3782
RUEHFR/AMEMBASSY PARIS 0087
RUEHQT/AMEMBASSY QUITO 4187
RUEHSG/AMEMBASSY SANTIAGO 8729
RUEHTC/AMEMBASSY THE HAGUE 0728
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 001316 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EAID EINV ENRG EPET PGOV BL
SUBJECT: GOB EXPLAINS HYDROCARBONS NATIONALIZATION 
 
REF: LA PAZ 1157 
 
¶1. (SBU) Summary: Hydrocarbons Minister Andres Soliz Rada, 
accompanied by the Finance and Planning Ministers, convened a 
meeting of international donors on May 12 to discuss the 
GOB's hydrocarbons nationalization decree issued on May 1 
(ref A).  After decrying the "neoliberal" economic model, the 
moral decline of the Bolivian state, and Bolivia's gas 
crisis, Soliz expounded upon the dependency of its neighbors 
-- Brazil, Argentina, and Chile -- on Bolivian gas.  He 
explained that future tax rates for the private companies 
would be set after the GOB completed audits to determine how 
much of their investments the companies had recouped.  He 
added that, even after being set, these rates could increase 
again in the future once companies had earned more.  He said 
that the current "shared-risk" contracts were illegal and 
that the GOB would seek to sign "association" contracts with 
the companies during the next six months. 
 
¶2. (SBU) He implied that the GOB intended to provide 
compensation to the companies that it planned to take over, 
perhaps through establishing a trust fund in which the GOB 
would place proceeds of future gas sales.  (Note: according 
to the May 1 nationalization decree, no compensation will be 
provided for the company shares held by Bolivian pension fund 
managers that the GOB plans to take over.  The GOB issued a 
decree on May 15 giving the pension fund managers three days 
to sign over their shares to YPFB, despite manager protests 
that such action would violate several laws.  End note.) 
Soliz said that the GOB planned to create a parallel 
treasury, using the proceeds of the new 32 percent YPFB tax, 
to use for whatever it desired, as it was frustrated by the 
lack of funds available in the National Treasury.  German 
Embassy officials told us that Germany would not provide 
budget support aid to Bolivia this year due to Bolivia's 
anticipated expropriation of assets from a German-invested 
hydrocarbons logistics company.  End summary. 
 
Soliz Rada Waxes Long on History 
-------------------------------- 
¶3. (SBU) In a May 12 meeting with international donors, 
Hydrocarbons Minister Soliz Rada claimed that the 
"neoliberal" policies enacted by the Bolivian government, 
beginning in 1985 with the issuance of Supreme Decree 21060, 
along with international cooperation, had weakened the state 
and led to the moral and economic breakdown of the country. 
He added that international sponsorship of GOB ministries had 
blurred the line between international interest and national 
interest, while GOB officials' involvement with multinational 
companies had blurred public interest and private.  He 
claimed that the hydrocarbons companies were paying part of 
the salaries of Hydrocarbons Ministry contractors, creating 
conflicts of interest within the ministry. 
 
¶4. (SBU) Soliz said that in 1996, when the previous 
(investor-friendly) hydrocarbons law was passed, Bolivia had 
0.7 TCFs of natural gas reserves, but now had 48 TCFs of 
reserves.  Although it was largely private investment that 
facilitated the discovery of these reserves, Soliz concluded 
that the state had freely transferred USD 10 billion worth of 
natural resources to the capitalized companies that had 
supplanted YPFB (the state oil company).  He said that the 
"solidarity" price of gas initially paid by Argentina (USD 
0.98) during the Carlos Mesa regime was not in solidarity 
with Argentina, but with the oil companies, who were both the 
buyers and the sellers of gas (Petrobras with Brazil and 
Repsol and Plus Petrol with Argentina). 
 
¶5. (SBU) Soliz went on to explain that 92 percent of the 
public had agreed with recouping the nation's hydrocarbons in 
a referendum held under former President Mesa, which led to 
the passage of a revised hydrocarbons law in May 2005.  He 
further explained that the GOB had issued a decree on May 1, 
2006 instead of a law, because the decree was based on the 
May 2005 law, which already spoke of nationalization.  The 
decree merely converted the law into practical reality, he 
said.  (Note: the decree went further than the law in terms 
of taxation and the GOB's take-over of Bolivian pension 
funds' assets without payment.  The GOB issued a decree on 
May 15 giving the pension fund managers three days to sign 
over their assets to YPFB or face intervention by the 
hydrocarbons regulator, despite the managers' arguments that 
several laws must be modified before they can legally take 
such action.  End note.) 
 
Bolivia's Leverage over its Neighbors 
------------------------------------- 
¶6. (SBU) Soliz claimed that Brazil, Argentina, and Chile 
needed Bolivian gas.  He said that 84 percent of the gas 
consumed in Sao Paulo came from Bolivia.  He added that 
Brazil would need another 50 million cubic meters of gas 
daily within the next few years, and that it was planning to 
use Bolivian gas to meet its needs.  Soliz said he told 
Brazilian officials that Bolivian troops were stationed at 
production facilities to ensure continued production and 
supply of exports to Brazil.  Soliz claimed that, because 
Chile relied on Bolivian gas sold to it by Argentina, "if 
Bolivia stopped selling gas to Argentina tomorrow, Chile 
would offer us the sea coast right away!" 
 
Decree Implementation Date and Tax Rates 
---------------------------------------- 
¶7. (SBU) Soliz explained that the May 1 nationalization 
decree could not be implemented immediately because of the 
Hydrocarbons Ministry's lack of technical experts and the 
need to audit the companies; thus, the decree had established 
a 180-day transition period.  He explained that the GOB had 
decided on the increased tax/royalty rate of 82 percent that 
was provisionally applied to the two largest producing fields 
as a symbolic reversal of the situation under President 
"Goni" Sanchez de Lozada, in which the GOB got 18 percent and 
the companies 82 percent.  Soliz claimed that Petrobras had 
not conducted any exploration in the two mega-fields, San 
Alberto and San Antonio, and that the Brazilian company had 
already amortized all of its investment costs, and therefore, 
it could afford to pay taxes of up to 90 percent.  However, 
if after the audits were conducted, the GOB determined that 
it had miscalculated, it would change the rates.  Soliz left 
open the possibility that even producers with small fields, 
who should receive tax breaks according to the 2005 law, 
might be required to pay more than 50 percent in taxes and 
royalties if they had recouped their investments.  He added 
that tax rates would be set after the audits, but that those 
rates could be increased again in the future once the 
companies had recouped more of their investments.  The Vice 
President of Chaco told us that she had heard that the GOB 
would push for profitability caps and progressive tax rate 
formulas that would be set out in the contracts after 
negotiations with the companies. 
 
Contract Legality, New Association Contracts 
-------------------------------------------- 
¶8. (SBU) Soliz said that the current shared-risk contracts 
were invalid, because they were not approved by Congress.  He 
explained that ignorance was not an excuse for failing to 
follow Bolivian law, and that the companies had lawyers who 
were just as responsible as the GOB for ensuring that legal 
requirements were met.  However, he recognized that the 
contracts had produced consequences and could not simply be 
disregarded, and therefore, the GOB planned to conduct audits 
and negotiate new contracts with the firms.  Soliz said that 
the GOB had modified its previous position and would now seek 
to negotiate "association" contracts with the companies, 
rather than "service" contracts.  (Comment: This is perhaps 
because of Petrobras' stated refusal to sign a "service" 
contract.  End comment.) 
 
Take-over of Five Companies 
--------------------------- 
¶9. (SBU) Soliz explained that the GOB would take over 
majority ownership of five companies (ref A).  He said that 
the Bolivian Constitution allowed expropriation with 
indemnification, and emphasized that President Morales 
planned neither to confiscate assets nor expel private 
investors, but rather to negotiate.  He said that Petrobras 
had accepted the GOB's compensation plan to pay it USD 35 
million for 50 percent plus one of its refineries' shares. 
He claimed that Petrobras actually had paid only USD 70 
million for the refineries, not USD 100 million, because at 
the time of purchase the refineries contained USD 30 million 
worth of diesel and gasoline in their storage tanks.  The GOB 
would likely pay for these shares by creating a trust fund in 
which it would place earnings from future gas sales. 
According to Soliz, Petrobras had agreed to this form of 
compensation and to the change in its board composition. 
Soliz added that Chaco had agreed to the GOB's take-over as 
long as its management structure and management salary scale 
were maintained. 
 
¶10. (SBU) Chaco Vice President Jana Drakic told us on May 16 
that Chaco had begun discussions with the GOB, and was 
disposed to negotiate shareholder equity changes if it could 
maintain operating control as a minority shareholder.  She 
added that Soliz had oversimplified Chaco's position.  The 
two key issues for Chaco were company profit margins (not 
managerial margins) and maintaining control over management 
decisions, but contract details and a shareholder agreement 
were also important, she explained.  She said that Chaco was 
not wedded to one particular type of contract, i.e. 
association or service, and that the details of the contract, 
and ultimately the protection of the company's bottom line, 
were what mattered, not the name.  The GOB has not yet begun 
audits of Chaco, she said. 
 
The Parallel Treasury 
--------------------- 
¶11. (SBU)  Although the Morales administration fought to 
eliminate government slush funds ("gastos reservados"), it 
now seeks to create one of its own.  Soliz said that the 
money derived from the new 32 percent YPFB tax applied to the 
two largest fields would be held in a special fund within 
YPFB that the central government could use for whatever 
projects it would like to pursue.  He noted that President 
Morales complained that the National Treasury lacked funds 
because the local governments were "like vampires" sucking 
all of the resources away.  Vice President Alvaro Garcia 
Linera stated in a speech May 1 that the new hydrocarbons 
taxes would generate up to USD 300 million in additional 
revenues for the GOB. 
 
Germans to Cut Aid 
------------------ 
¶12. (SBU) Although Soliz declared that "as a member of the 
international community, Bolivia has a right to international 
 
cooperation that complements Bolivia's internally-set 
policies," some donors left the briefing with differing 
opinions.  Attendees from the German Embassy told us that 
Germany would not be providing budget support aid to Bolivia 
this year due to the GOB's plan to take-over the 60 percent 
German-owned Bolivia Hydrocarbons Logistic Company. 
 
¶13. (SBU) Comment:  Soliz' statements implied that some form 
of compensation would be given to the companies that are 
being taken over by the GOB, including two partially 
U.S.-owned companies, Transredes and Chaco.  However, if 
payment for company shares is to be made through future gas 
sales, it is likely to be neither prompt nor adequate.  Soliz 
again demonstrated in front of a broader international 
audience the strong ideological arguments informing the GOB's 
hydrocarbons policy.  There remains a steady grumbling among 
European and Brazilian diplomats, as well as representatives 
of international financial institutions, as commercial 
interests are threatened and the further development of 
Bolivia's hydrocarbons industry is placed in jeopardy.  End 
comment. 
ROBINSON